Bank CDs vs. Money Market Accounts

by Kevin Johnston

When you want to squirrel away money in a bank account, your best two choices are certificates of deposit and money market accounts. These pay higher interest than regular savings accounts. Take your time to learn the ins and outs before you choose a place for your money, since you might have to pay penalties if you change your mind after you invest.

Higher Interest Rate

CDs pay you a specific interest rate for a set period. For example, you might earn 1 percent from a one-year CD if you leave your money in it for a year. You can make more interest on CDs than you can in a money market account. The interest is compounded daily. That means you earn interest every day, and then you make money on the new balance. You have a guarantee of your interest rate for the full term of the CD. If you want a short-term parking place for your money, you can consider a three-month CD. If you want longer-term, think about a two-year or three-year version.

Penalties

Your money gets locked away for the term of the CD and you can't touch it. If you have an emergency, you will pay heavy penalties for raising your savings early. This means a CD is not a good investment if you think you could possibly need your cash soon. To get around this, shorten the length of the CD you invest in. For example, instead of a one-year CD, try a six-month option. You'll get a lower rate that way, but you'll avoid penalties if you need the money on the seventh month or after.

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Getting to Your Cash

Money market accounts have no term limits. You can withdraw your money anytime you want it. In fact, you receive checks with this type account. Though banks limit the number of checks you can write each month, you can spend the money without going to the bank to withdraw it. You earn interest on each day's balance, and that interest gets compounded. The rates are higher than with regular savings accounts.

Spending Your Investment

Because you can get to your cash in a money market account so easily, you may have a tendency to use it. Your account can become a checking account that you routinely raid for extra expenses. This defeats the purpose of saving money. Your account can go down in value instead of up. Make a habit of adding money to your account instead of spending it, and you'll boost your savings.

References

About the Author

Kevin Johnston writes for Ameriprise Financial, the Rutgers University MBA Program and Evan Carmichael. He has written about business, marketing, finance, sales and investing for publications such as "The New York Daily News," "Business Age" and "Nation's Business." He is an instructional designer with credits for companies such as ADP, Standard and Poor's and Bank of America.

Photo Credits

Keith Brofsky/Photodisc/Getty Images

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